The Informal Labour Market
AKA Black or shadow markets
The informal market (also known as the black market or shadow market) is a market where economic activity is not recorded. These markets are without government intervention and regulation. Therefore, firms and employees in these markets do not pay corporation or PAYE tax.
The estimated size of the informal market is 10% of the nation’s GDP, which is below the average of the EU.
It tends to be the case that developing countries have higher levels of informal market activity. Developed countries keep more of their economic activity recorded whereas developing countries generally have more of their economic activity “off the record”. This is because they probably don’t have the resources available to prevent and police the informal market. There could also be higher levels of corruption.
The negatives of informal labour markets
1. No minimum wages or welfare - because the government does not have any presence in the informal markets, it means that employees are not protected by the National Minimum Wage and they will not receive a pension. They are also not protected by employment contracts to minimise the risk to employees. There will also be no sick pay laws.
2. Low wages - many working in black markets are on wages of approximately £4 or £5 per hour, which is far below the minimum wage. This decreases welfare for employees significantly, although they do not pay taxes on this income.
3. Worker exploitation – working conditions and unfair treatment due to lack of employment rights.
4. Unfair competition – firms that do not pay employees minimum wages or taxes have an unfair competitive advantage over other like-sized firms. This encourages small firms to take part in illegal black-market activity. However, it can be a good thing if the market is dominated by a monopoly power (see below for more on this point).
5. Lower tax revenue – firms not paying taxes will not benefit the government budget.
However, there are benefits of an informal labour market.
Many small businesses would simply not survive if they had to pay minimum wages + all other employment costs.
For example, Domino’s Pizza vs Independent Pizza shop.
Domino’s Pizza is a large multinational corporation (MNC). It has to play by the rules and pay its employees the minimum wage approx. £7-8 per hour. Domino’s can be considered a monopoly power in the pizza delivery industry. They have monopsony buying power and economies of scale. Therefore they have lower average costs than what other small pizza shops would be able to achieve.
Independent pizza shops may be able to hire employees off the radar i.e. informal labour market. This means wages for workers can be lowered to a level below the minimum wage and employment contracts do not have to be offered. This keep the pizza place in business, because without the lowered labour costs it would not be able to price compete with a large multinational monopoly like Domino’s.
Therefore, the benefits of informal labour markets are:
1. Increased labour flexibility
2. Cheaper labour costs
3. Increased labour supply
4. Jobs available for workers who are unable to get jobs elsewhere (perhaps due to a criminal background)
5. Provides some competition against price making firms
In summary, we have learned:
What an informal labour market is
Positives and negatives of informal labour markets
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